03/6/17

DID FRB CHAIR YELLEN TELEGRAPH A STRONG LABOR REPORT?

By: Kent Engelke | Capitol Securities

Did FRB Chair Yellen telegraph a strong labor report for Friday? Yellen commented “an interest rate increase would be appropriate at the central bank’s upcoming meeting if employment and inflation continue to meet policy makers’ expectations.”

Fed funds futures, which are a gauge of market sentiment, are now suggesting a 96% chance of interest rate increase on March 15. Seven days ago the odds were less than 40%.

As noted the other day, the markets have now discounted three interest rate increases for 2017, the amount the Committee suggested in late 2016. I do think it is noteworthy that at the start of 2016, central bankers expected to make four rate increases, but only did one and that was in December.

Because of these missed outlooks, many have become complacent about the risks within the sovereign debt markets; risks that I think are substantial. Several weeks ago, I opined about the possibility of more rate increases than expected because of stronger growth, the result of uncontained “animal spirits;” animal spirits that have been caged for over eight years because of regulatory zeal and crushing tax policies. This zeal/policy has now been perhaps caged if not reduced.

Is market focus now switching from attention to Trump’s proposals to data and how this data will affect monetary policy? This week is a heavy data week and if the markets respond to these statistics, the answer is yes.

As noted above, Friday the all-inclusive BLS labor report is released. Analysts are expecting a 4.7% unemployment rate, a 190k and 185k increase in nonfarm and private sector payrolls respectively, a 0.3% increase in hourly earnings, a 34.4 hour work week and a 62.9% labor participation rate.

Markets Friday were relatively unchanged with the exception of oil which rose about 1.5% as the major oil ports in Libya were seized by militants.

Last night the foreign markets were mixed. London was down 0.34%, Paris down 0.42% and Frankfurt down 0.37%. China was up 0.48%, Japan down 0.46% and Hang Sang up 0.18%.

The Dow should open moderately lower on monetary policy concerns. The 10-year is unchanged at 2.48%.

02/15/17

WAS FRB CHAIR YELLEN’S TESTIMONY A NONEVENT?

By: Kent Engelke | Capitol Securities

If one uses fed fund futures, which are a gauge of market sentiment, FRB Chair Yellen’s testimony was almost a nonevent. Before she began testifying, the market was suggesting a 30% probability of a change in monetary policy in March. Now it is 34%.

Yellen said the Fed panel’s outlook for a “moderate pace” of growth is based on continued stimulative monetary policy and a pickup in global activity. She did not mention Trump administration proposals as a key element in the central bank’s forecast.

The Chair stated that consumer spending has continued to rise at a “healthy pace,” supported by gains in household income and wealth, favorable sentiment and low rates. The Fed chief said changes in fiscal and economic policies could affect the outlook, though she declined to speculate how, adding it is “too early to know” what policy changes will be put in place.

The longer dated Treasury market however had a different view of Yellen’s remarks. The 10-year increased in yield to around 2.50%. Last week, it was yielding about 2.32%. Will yields climb to December’s peak of 2.60%? The 30-year Treasury rose to 3.09% versus last week’s level of 2.92%. In December, the 30-year hit a 3.18% yield.

Did yields advance because of Yellen’s remarks suggesting a gradual increase in the overnight rate, which then may suggest the central bank could fall behind the proverbial inflationary curve?

Speaking of which, wholesale prices jumped in January by the most since September 2012, led by higher gasoline costs, thus suggesting inflation is beginning to stir. The 0.6% gain in the PPI followed a 0.2% advance in the prior month. Consensus called for a 0.3% rise.

Equites led by the financials, staged an advance on economic optimism.

Last night the foreign markets were up. London was up 0.49%, Paris up 0.50% and Frankfurt up 0.10%. China was down 0.15%, Japan up 1.03% and Hang Sang up 1.23%.

The Dow should open quietly lower assessing Yellen’s comments. The 10-year is off 3/32 to yield 2.49%.